SEC Issues New FAQs on Conflicts Minerals Disclosure

Yesterday, the SEC’s Division of Corporation Finance published nine additional FAQs on the specialized disclosure requirements relating to conflict minerals, supplementing a set of FAQs issued in May 2013. The FAQs can be found on the SEC’s website.

The conflict minerals disclosure is a new requirement that was adopted in 2012 pursuant to the Dodd-Frank Act. The new disclosure is required for the first time for calendar year 2013 on new Form SD, which must be filed with the SEC no later than June 2, 2014. We expect that most issuers required to file Form SD are in the final stages of conducting a reasonable country of origin inquiry and any additional due diligence, and are drafting their disclosure, including the Conflict Minerals Report if required. We have prepared a checklist for Form SD and the Conflict Minerals Report that issuers may find useful as they finalize their disclosure, available here.

The interpretive points clarified in the new FAQs relate to the Conflict Minerals Report, which some issuers are required to include as an exhibit to Form SD. In particular, most of the new FAQs address the requirement for an independent private sector audit (“IPSA”) of the Conflict Minerals Report, including the following:

• During the transition period (four years for smaller reporting companies and two years for all other issuers), an IPSA is not required if an issuer determines that at least one of its products is “DRC conflict undeterminable”; however, if no IPSA is obtained, the issuer may not describe any of its other products as “DRC Conflict Free.”
• An auditor that is not a certified public accountant may perform an IPSA if the audit meets the applicable requirements under the Performance Audit provisions in the U.S. Government Accountability Office’s Government Auditing Standards (Yellow Book).
• An IPSA need not cover any matter beyond the required audit objectives set forth in Rule 13p-1, which are 1) whether the design of the issuer’s due diligence measures conforms, in all material respects, with the criteria set forth in the recognized due diligence framework the issuer used and 2) whether the description of the due diligence measures the issuer performed is consistent with those the issuer actually undertook.
• An IPSA does not need to cover an issuer’s reasonable country of origin inquiry because that is a distinct step under the rule, separate from the due diligence process.
• The Conflict Minerals Report need not include a full description of the design of the issuer’s due diligence; however, the due diligence measures actually undertaken must be described in sufficient detail to allow the auditor to form an opinion about whether the description is consistent with the issuer’s actual process.

The FAQs also clarified the following points related to Conflict Minerals Reports:

• The issuer’s due diligence measures do not need to be carried out constantly throughout the year. The measures can also begin before or extend beyond the calendar year covered by the Form SD.
• Products that contain multiple conflict minerals from different sources must be described as “not having been found to be DRC conflict free” if even one of those minerals did finance or benefit armed groups in the DRC or an adjoining country; similarly, if the issuer is unable to determine the source of even one of those minerals, it may not describe the product as “DRC conflict free.”
• If the issuer determines that the conflict minerals in some of its products come from recycled or scrap sources, but is also required to prepare a Conflict Minerals Report as to the conflict minerals in some of its other products, the report (and any required IPSA) need not include disclosures about the recycled or scrap sources.

For additional information about the conflict minerals rule, see our Alert Memo dated September 12, 2012, available here, and our Alert Memo regarding the SEC’s first set of FAQs dated May 31, 2013, available here. 

Please feel free to call any of your regular contacts at the Firm or any of our partners and counsel listed under “Capital Markets” or “Corporate Governance” in the Practices section of the website if you have any questions.